Deals start to ease

Signs are emerging that distressed hotel assets are starting to trade, as administrators and holders of debt push for resolution. 

The pragmatic signals will be a welcome sign for those with funds to invest, heralding the easingn up of a market that has, to date, seen little of the expected wave of distressed asset sales. Two recent deals are instructive, serving as they do to provide a hint at the way markets are moving.  

In London, the 212 room Yotel in Clerkenwell has just sold out of administration, to institutional fund buyer Legal & General Investment Management, for GBP70m. The deal sees the fund buy into a newly completed development, and is a first as the development will operate under a management agreement.  

Shaun Roy, head of hotels at Knight Frank, said Yotel’s developer was a victim of timing, having acquired the site from NAMA, worked through planning, found an operator and delivered the property with practical completion in April 2020. With the property then unable to open and trade as normal, they had little option but to place the asset into administration. 

Roy said bidders included US institutional capital, and Far Eastern capital, as well as a number of private equity underbidders. “Those people were generally London buyers, not specifically hotel buyers.”  

Will Kirkpatrick, head of hotels at Gerald Eve, said several funds have been looking at the possibility of buying hotels run under management agreements – but face challenges around operational liabilities, and valuing a variable income. “What is exciting is that LGIM have bought this in one of the darkest of times. They got the asset at a sensible price,” and were able to complete quickly on the deal with administrators.  

Using a similar legal ownership structure, Kirkpatrick suggests other institutional fund investors may now feel comfortable moving into ownership of hotels that operate under non-lease vehicles and under a management agreement.  

Gerald Eve partner Robert Chess said that hotels are now on the radar of more fund investors, due to their relative resilience and the strong underlying performance of the hotel market: “The funds have substantial cash, and the retail and office spaces are challenging places to be at the moment.” As a result, sheds and beds are the focus. 

Gerald Eve’s own research suggests around 23% of large hotels in the UK are subject to pure leases, with operators such as Dalata, Premier Inn, Travelodge and Staycity happy to sign them. But the best of those properties now trade on very low yields – for example the Travelodges at King’s Cross and Euston were last sold, pre-covid, at a yield of marginally above 3%. For those seeking better returns, hotels under management agreements could be an option to extract the higher income at a yield reflecting the addtional risk of variable income 

“If you get this right, you’ve got a better alignment of interests,” said Chess. The Yotel management agreement sees Yotel itself directly hiring staff, while there is a sinking fund drawing off revenues to prepare for future refurbishments.  

Looking ahead, Chess said: “There is liquidity, there is money to invest, the sooner the market opens up, the better. I think we will see an increasing amount of stock in the second half of this year.” 

Elsewhere, private equity investor Pygmalion Capital has acquired two Hilton branded hotels in Florence, Italy. The Hilton Florence Metropole and the Hilton Garden Inn Florence Novoli, totalling 333 keys were acquired out of a non-performing loan package, and will continue to trade in future under their existing branding.  

Christophe Beauvilain, founder and managing partner of Pygmalion Capital Advisers, told Hotel Analyst the original bank loans on the properties had been sold on to a third party distressed loan acquirer. “It was a complex loan arrangement, and a complex three way negotiation with the lender and the creditor.”  

Beauvilain said the reported volume of European non-performing loans has been growing quarter by quarter over the last year. “It’s certainly not a one-off, I expect NPLs to increase – logically, it’s going to follow the same process as after the global financial crisis.” 

“Distressed sellers want to sell quietly – we are seeing a decent number of inquiries. For us, it’s on a case by case basis. We are very opportunistic, we have a pan-European mandate.” As well as opportunities in Italy, Beauvilain says Pygmalion is looking at opportunities in Spain, Ireland and the UK.  

Pygmalion is already busy managing a number of European hotel assets, having partnered in 2018 with CBRE Global Investment Partners; that joint venture already manages nine hotels which were purchased with a view to repositioning them.  

But one portfolio that has come off the market is the UK QHotels package. Having sought a solution to their midmarket hotel investment – rumoured to be a disposal – owners Aprirose and Cindat have instead agreed fresh financial terms with a group of lenders, led by Barclays and Santander. The refinancing of the 20-strong portfolio means the owners can now push ahead and ready the properties for what promises to be a strong UK staycation market this coming summer.   

“We believe the market is set for huge staycation growth,” said Aprirose CEO Manish Gudka. He said there will also be opportunities arising from companies who allow more at-home working: “We anticipate significant growth in conference and events business, of a new kind where businesses make up for lost collaboration and few days in the office by getting staff together more regularly.”  

HA Perspective [by Chris Bown]: There are open market deals, and off-market deals – we get to hear about plenty of the former, and not so many of the latter. But it seems the latter could well be to the fore, over coming months. As Beauvilain suggests, the eyewatering volume of non-performing loans across Europe is likely to lead to more packaged debt sales, allowing for swift negotiations and deals away from the spotlight. It’s not quite at the volume reached in the GFC, but it could present significant opportunities for the nimble.  

And another agent confirmed: “The sale of NPLs is probably the easiest way for banks to get rid of their dirty laundry.” Expect private equity to quietly pick up those problematic loans – and follow the loan to own route we saw used regularly out of the last crisis.  

Meanwhile, the Yotel deal in London points up the dilemma faced by investors in property, and the need for creative solutions. With retail and offices rocky, hotels suddenly look relatively attractive; and with Gerald Eve and their legal colleagues working out a way for funds to comfortably hold hotels run under management contracts, we welcome a new band of investors to a new subset of the accommodation landscape.  

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